The May Count

05/21/04 09:48:08 AM

by David Penn

With a minute ii wave peak in late April, look for the current decline in the S&P 500 to bottom near 1045.

Security: $SPX
Position: N/A

So far, the alternative Elliott wave count I provided in a recent Traders.com Advantage article ("The Alternative Wave Count Cometh," April 8, 2004) seems to represent a fairly accurate mapping of the market since mid-February, the date at which it appears as if the S&P 500 topped -- at least on an intermediate-term basis. Of course, those who follow mainstream Elliott wave thinking these days would know that calling the February 2004 peak merely intermediate is a hedge. In the long-term, Elliott wave practitioners are exceptionally bearish on this market. And recent price action may be underscoring that position.

My current wave count has the S&P 500 in a bearish minute wave iii. Minute wave i took the S&P 500 from its February 2004 peak to a low in mid-March. Minute wave ii took the S&P 500 up in what appears to be a running correction (specifically, a "running zigzag") that peaked out in mid- to late April.

Minute wave iii, it appears, can be further broken down into minuette waves. Right now, I believe the market is in minuette wave (iv), which should be the last consolidation range/accumulation-distribution zone before the market makes a "final" minuette wave (v) bottom.

The minuette waves within minute wave iii appear to be as follows:

Minuette (i): Began on 4/27 at 1145 (38 points)
Minuette (ii): Began on 4/30 at 1107 (18 points)
Minuette (iii): Began on 5/5 at 1125 (49 points)
Minuette (iv): Began on 5/12 at 1076 (30 points)

These four waves down augur a fifth and "final" wave that should represent a temporary bottom in the S&P's now three-month decline.

Graphic provided by: Prophet Financial Systems, Inc..

There are a number of ways to determine the extent of the coming wave (v). For one, fifth waves are often approximately the same size as first waves. If that were to be the case here, then a 38-point fifth wave would take the S&P 500 down to 1068. If the minuette fifth were to be the same size as the third wave, then a downside of 1057 would be more likely.

Other methods include the one by Robert Fischer (his book is Fibonacci Applications and Strategies for Traders), about which I have written frequently in both Traders.com Advantage and Working-Money.com. To reiterate, Fischer calls for multiplying the length of wave one by 1.618, and subtracting that product from the value at the end of wave one. In other words, 38 x 1.618 = 61.48. The end point of wave one, 1107, less 61.48 is approximately 1045.52. I refer to this as the "wave one projection of wave five." Something similar is done with wave three. With wave three, Fischer instructs us to multiple its length by 0.618, and to subtract that product from the value at the end of wave three. Here, 49 x 0.618 = 30.28. The end point of wave three, 1076, less 30.28 is approximately 1045.72. This would be the "wave three projection of wave five."

As I've written elsewhere, I prefer to study the range between the two projections rather than average the two together, as Fischer suggests. In this case, however, either method arrives at the same result: 1045.

For Elliott wave agnostics and antagonists, there is another, even simpler reason to suspect that a bottom in the current decline might develop near 1045. If we apply Weinstein's swing rule, with the early May lows at 1076 as the "hinge" and the recently established May highs at 1106 as the peak, then a "swing around the hinge" (1106 - 1076 = 30; 1076 - 30 = 1046) suggests a downside of 1046.

Such a decline, however arrived at or anticipated in advance, would represent a correction of some 10% from the February 2004 peak, and would likely find some support below the lows of December 2003, while above the lows of November.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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